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Common financial mistakes people make

Written By : RAVI MEHTA* Indian Weekender. A wise man learns from the mistakes of others. There is no need for you to make those mistakes when you have examples
07 Jan 2011 12:00

image Written By : RAVI MEHTA* Indian Weekender. A wise man learns from the mistakes of others. There is no need for you to make those mistakes when you have examples of what you should not do, rather you can learn from those. Here are few common financial mistakes that people make.

1. Buying a house or other assets jointly with someone other than one’s spouse and taking a joint mortgage.

In a loan, all the parties are jointly and severally liable for the loan. If you buy a property taking mortgage, jointly with your friend, you are liable for full loan if your friend fails to meet the commitment. Your friend may have very good intentions at the time of purchase and taking of mortgage, but you cannot control his/her financial decisions. If that friend runs into financial trouble and fails to pay his/her share in joint mortgage, you are liable to pay full instalment. If you are repaying only your share and the mortgage is going into arrears, your credit is also getting impaired.

2. Giving your credit card for use to someone or buying for someone on hire purchase in your name.

I have seen people helping others, example those who are on student visa, find it difficult to buy goods on hire purchase. If you lend a helping hand and buy in your name, there is no problem as long as you are making the payment and it is within your control. But if you buy and assign the responsibility of payment to the person for whom you have done the transaction and after that do not care, you are making a costly mistake. The other person may be careless or may get into a financial difficulty. He/she may lag behind in making payments; it can seriously impact your credit history and your future borrowing power.

3. Not having adequate insurance.

Some people consider insurance premiums as a waste of money. Imagine people who do not have even third party insurance in respect of their cars. They do not understand how devastating the effect can be on their finances. If they hit some one’s car and they are at fault, their liability may run into tens of thousands depending on how expensive is the car they have crashed into and how big is the loss to that other vehicle.
Also imagine, someone having a shop with sizable stock in it and not having fire and general insurance cover in place.
Similarly, not having adequate life, trauma, and mortgage protection insurance can have serious consequences.
Remember; in insurance different people contribute money towards a common pool, unfortunate are ones who get claims and they are fortunate who only pay premiums and never have the misfortune of claiming. So, one should have adequate insurance cover in place, at the same time one should not be over insured, that can be a waste of money.

4. Paying cheaper loans in priority to expensive loans.

When you look at cost of a loan, you should look at after tax cost of that loan. Interest on some of loans may be tax deductible and on some it may not be. It is cost after tax benefits, which should be considered while deciding about which loan to pay faster.

5. Not saving enough for retirement and not taking full benefit of Employer/ Government subsidies.

In New Zealand, State matches your contribution to Kiwi Saver up to maximum of $1043 per year. Similarly the employers are bound to contribute at least 2 per cent of your wages/salary to Kiwi Saver provided you also contribute the same. Some of employers even contribute more voluntarily provided employee is also contributing. Kiwi Saver/superannuation are very good investment plans. Regular contributions and compounding returns can fetch you very good returns by the time you retire. You will realise the mistake very late in life, if you do not join today, but by then it will be too late.
The list of financial mistakes people make is long and is beyond the space allocated for this column but avoiding these mistakes can help you to achieve your goal of financial independence.
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Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz. A disclosure statement under Securities Markets Act relating to his services is available on request and is free of charge.


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